Investing in large-scale volatile investments can be a significant drain on the time, money and resources of the investor. Accordingly, such investment systems often do not justify the associated relative risk to the individual investor. As an example, and not by way of limitation, it is difficult, risky and expensive for investors of low to moderate net worth (e.g., less than $3M) to invest in oil and gas wells. Exploration and drilling requires substantial capital and is typically funded by large-scale businesses and investors.
Speculative and costly investments like oil and gas wells typically include a complex vertical investment structure including individual investors, brokers, dealers, operators, leaseholders, and owners (equipment, land, resources, etc. . . . ). This structure and the sheer number of participants reduces the bargaining power and influence that an individual investor can expect as part of the transaction. Individual investors are also susceptible to unscrupulous business practices from any one of the participants in the vertical structure.
In order to protect individual investors from speculative investments and from unscrupulous participants in the investment structure, many laws, regulations and rules are typically promulgated in the industries involved in speculative investments. Such laws, regulations and rules are enacted at the federal, state and local level. Various governing bodies with competent jurisdiction over these industries also enact and enforce many regulations intended to protect individual investors and the public generally. As an example, participation units in certain investments may be classified as securities which trigger federal regulation by the Securities and Exchange Commission (“SEC”).
Although the laws, regulations and rules are important safeguards to protect the individual investor, they also add substantial layers of administrative function to each investment. For example, it is not uncommon for agreements executed by investors in a speculative investment to exceed one hundred pages in length, and cover technically complex legal and business issues that are outside the comprehension of an unsophisticated investor. Thus, these administrative procedures make it difficult and undesirable for an individual investor to invest smaller sums of money in any particular speculative investment.